IMF forecasts increasing growth, calls for raising interest rates

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The International Monetary Fund (IMF) has revised its forecast for Ethiopia’s GDP predicting improved performance. They now feel it will grow 8.5 percent through 2014/15. The IMF has also recommended raising interest rates nominally.
Every year the IMF consults with each member government. Through these contacts, known as “Article IV Consultations,” the IMF attempts to assess each country’s economic health and to forestall future financial problems. On this visit, which lasted from June 11-25, they consulted with Prime Minister Hailemariam Desalegn, Teklewold Atnafu, Governor of the National Bank of Ethiopia (NBE), Dr Abraham Tekeste, State Minister of Finance and Economic Development, and Newai Gebre-ab, Economic Advisor to the Prime Minister. After the meetings the IMF reported that the nation continues to experience robust growth and single-digit inflation.
The mission projects real GDP growth in the 8-8.5 percent range for 2013/14 and 2014/15. The expansion in economic activity has contributed to poverty reduction and progress toward achieving the Millennium Development Goals.
A year ago the monetary institute predicted the economic growth would stand at 7 percent, but based on its latest statement the IMF has revised its forecast to 8.5 percent.
The Ethiopian government and the IMF historically disagreed on the growth forecast. The government continues to predict double digit growth. Despite the differing forecasts most international organizations agree Ethiopia has one of the fastest growing economies in the world.
Even though the trade balance deteriorated this year, it was partly offset by higher net inflows from services and transfers. Strong external loans and higher foreign direct investment, however, allowed for a modest increase in gross international reserves. As usual it said that sizeable investment spending on public enterprises continues to absorb a large share of domestic financing and constrain credit available to the private sector.
“Going forward, the mission recommends a continued cautious monetary policy stance that keeps money growth consistent with preserving the gains on inflation and achieving robust economic growth. The stable inflation conditions are ripe for developing market-based instruments of indirect monetary control,” it stated.
This cautious stance involves raising nominal interest rates, the rate of interest before inflation, to activate the Treasury Bill market which should allow for better management of liquid assets.
The report says there is room to improve the market functioning and price setting mechanisms for the exchange rate. This could lead to greater exchange rate flexibility which would help clear the foreign exchange market and promote the competiveness of the traded goods sector. The IMF says they support the NBE’s objective of gradually raising foreign exchange reserves to 3 months worth of imports.
A year ago the IMF report also indicated that the country’s reserve coverage ratio would stagnate at 1.7 months of imports in 2013, which is similar to the previous year’s (2012), but would grow to 1.8 months in 2014.
The mission stressed the importance of obtaining comprehensive financial information about major public enterprises to establish an overall fiscal anchor. The consolidated fiscal position is required to assess the fiscal policy impact, macroeconomic developments and debt sustainability. “The continued large borrowing of the public sector with a large share from the domestic banking system is crowding out the private sector,” the statement reads. On several occasions the IMF has recommended that the government make it easier for the private sector to obtain more financing, which the private sector has also requested.
The IMF recommended that to create jobs and support the private sector, government borrowing should be reduced either by prioritizing investment projects or attracting more external financing at competitive rates.
“Ethiopia’s public sector led development strategy has delivered robust growth and rising living standards. To sustain these achievements, adapting policies to provide greater scope for the private sector will be important. In terms of the next Growth and Transformation Plan, consideration should be given to mitigating constraints to private sector development and improving export competiveness,” it said.
It indicated that concerted efforts are needed to make trade logistics more efficient, increase access to financial services, ensure competitive exchange rates, and provide a predictable regulatory environment for businesses.
“Harnessing the transformation power of private enterprises will be increasingly important as Ethiopia transitions from an agricultural to industrial based economic growth,” it stated.
The IMF Executive Board is expected to complete the 2014 Article IV consultation in September 2014.